In re MORGAN STANLEY & CO. LLC

 UNITED STATES OF AMERICA 
 Before the 
 SECURITIES AND EXCHANGE COMMISSION 
 
SECURITIES EXCHANGE ACT OF 1934 
Release No. 73801 / December 10, 2014 
 
ADMINISTRATIVE PROCEEDING 
File No. 3-16310 
 
 
In the Matter of 
 
MORGAN STANLEY & CO. LLC 
 
Respondent. 
 
 
ORDER INSTITUTING ADMINISTRATIVE 
AND CEASE-AND-DESIST PROCEEDINGS, 
PURSUANT TO SECTIONS 15(b) AND 21C 
OF THE SECURITIES EXCHANGE ACT OF 
1934, MAKING FINDINGS, AND IMPOSING 
A CEASE-AND-DESIST ORDER 
 
 
I. 
 
 The Securities and Exchange Commission (“Commission”) deems it appropriate and in the 
public interest that public administrative and cease-and-desist proceedings be, and hereby are, 
instituted pursuant to Sections 15(b) and 21C of the Securities Exchange Act of 1934 (“Exchange 
Act”) against Morgan Stanley & Co. LLC (“MS & Co.” or “Respondent”). 
 
II. 
 
In anticipation of the institution of these proceedings, Respondent has submitted an Offer 
of Settlement (the “Offer”) which the Commission has determined to accept.  Solely for the 
purpose of these proceedings and any other proceedings brought by or on behalf of the 
Commission, or to which the Commission is a party, and without admitting or denying the findings 
herein, except as to the Commission’s jurisdiction over it and the subject matter of these 
proceedings, which are admitted, Respondent consents to the entry of this Order Instituting 
Administrative and Cease-and-Desist Proceedings, Pursuant to Sections 15(b) and 21C of the 
Securities Exchange Act of 1934, Making Findings, and Imposing a Cease-and-Desist Order 
(“Order”), as set forth below. 
 
III. 
 
 On the basis of this Order and Respondent’s Offer, the Commission finds
1
 that: 
                                                 
1
 The findings herein are made pursuant to Respondent's Offer of Settlement and are not binding on any other person or 
entity in this or any other proceeding. 
 

 
2 
 
Summary 
 
 1. The subject of these proceedings is MS & Co.’s violation of Exchange Act Rule 
15c3-5 (“Rule 15c3-5” or the “Market Access Rule”), which requires brokers or dealers to 
establish, document, and maintain a system of risk management controls and supervisory 
procedures reasonably designed to manage the financial, regulatory, and other risks associated with 
providing customers access to the markets.  MS & Co. is a registered broker-dealer that offers its 
institutional customers direct market access through an electronic trading desk that is part of the 
firm’s Institutional Equity Division (Morgan Stanley Electronic Trading, or “MSET”).   
 
 2. One requirement of the Market Access Rule is that broker-dealers reasonably 
design controls and supervisory procedures to prevent the entry of orders that exceed pre-set 
aggregate credit thresholds for customers.  The Commission adopted the Market Access Rule, in 
part, to require that brokers or dealers, as gatekeepers to the financial markets, “appropriately 
control the risks associated with market access, so as not to jeopardize their own financial 
condition, that of other market participants, the integrity of trading on the securities markets, and 
the stability of the financial system.”
2
  The requirement that a broker-dealer establish automated 
pre-trade aggregate credit thresholds is important because such limits “should protect broker-
dealers providing market access, as well as their customers and other market participants, by 
blocking orders that do not comply with applicable risk management controls from being routed to 
a securities market.”
3
 
 
 3. The events of October 25, 2012 revealed that MS & Co.’s controls and supervisory 
procedures were not reasonably designed to prevent the entry of orders that exceed pre-set 
aggregate credit thresholds for customers.  On that day, MSET twice increased pre-set aggregate 
credit thresholds for its customer Rochdale Securities LLC (“Rochdale”) (a registered broker-
dealer that accessed MSET’s platform on behalf of its own institutional customers), initially from 
$200 million to $500 million and subsequently from $500 million to $750 million, when it 
received a series of orders for approximately $525 million of Apple, Inc. (“Apple”) stock—an 
amount that would have exceeded Rochdale’s threshold had it not been increased by MSET.  
Unbeknownst to MSET, David Miller (“Miller”), the registered representative at Rochdale with 
whom MSET personnel were interacting on October 25, 2012, was using these orders to commit 
fraud.  A Rochdale customer purportedly instructed Miller to purchase 1,625 shares of Apple.  
Miller instead purchased 1,625,000 shares of Apple at a cost of almost $1 billion, scheming to 
personally profit by sharing the anticipated proceeds with the customer if Apple’s stock price 
increased.  Miller falsely informed Rochdale that he was trading on behalf of a customer.  
Approximately 860,200 of the Apple shares Miller purchased were executed through MSET, and 
Miller falsely informed MSET that these trades were on behalf of a Rochdale customer.  When 
Apple’s stock price began dropping, and it became clear that the trades would not be profitable, 
                                                 
2
 Risk Management Controls for Brokers or Dealers with Market Access, 75 Fed. Reg. 69792, 69792 (Nov. 15, 
2010) (final rule release). 
 
3
 Id. at 69801.   
 

 
3 
Miller falsely claimed that he had made a mistake, leaving Rochdale holding the unauthorized 
purchase and suffering a loss of approximately $5.3 million.
4
 
 
 4. As explained when the Commission adopted the Market Access Rule, a broker-
dealer should make determinations of appropriate credit thresholds for each customer for which it 
provides market access “based on appropriate due diligence as to the customer’s business, financial 
condition, trading patterns, and other matters, and document that decision.  In addition, the 
Commission expects the broker-dealer will monitor on an ongoing basis whether the credit 
thresholds remain appropriate, and promptly make adjustments to them, and its controls and 
procedures, as warranted.”
5
 
 
 5. Beginning in November 2011 and continuing through at least October 25, 2012 (the 
date on which MS & Co. twice increased aggregate credit thresholds for Rochdale), MS & Co.’s 
system of risk management controls and supervisory procedures was not reasonably designed to 
manage the risks associated with the market access it provided and, as a result, MS & Co. violated 
the Market Access Rule.  In particular, MS & Co. did not have reasonably designed controls and 
supervisory procedures because those controls and procedures, as reflected in MS & Co.’s Rule 
15c3-5 written supervisory procedures (“WSPs”), did not reasonably guide MSET personnel in 
determining whether to modify the customer credit thresholds that are required under Rule 15c3-
5(c)(1)(i), including in situations in which personnel were confronted with a customer order to 
purchase equity securities in an amount that exceeded the threshold.  As a result of these 
inadequate controls and procedures, MS & Co. twice increased Rochdale’s aggregate credit 
threshold on October 25, 2012 without appropriate due diligence to ensure that the credit increases 
were warranted. 
 
Respondent 
 
 6. Morgan Stanley & Co. LLC (“MS & Co.”) is a U.S.-based broker-dealer and a 
wholly-owned subsidiary of Morgan Stanley.  MS & Co. is registered with the Commission 
pursuant to Section 15 of the Exchange Act and is a Financial Industry Regulatory Authority 
member.  MS & Co. has its principal business operations in New York, New York. Morgan 
Stanley Electronic Trading (“MSET”) is a trading desk within MS & Co.’s Institutional Equity 
Division that offers its customers direct market access. 
 
MS & Co.’s Rule 15c3-5 Written Supervisory Procedures and Controls 
7. MS & Co.’s Rule 15c3-5 WSPs from approximately November 2011 until at least 
October 25, 2012 required the firm to establish pre-trade single order thresholds and aggregate 
credit thresholds
 
for new MSET customer accounts.  Single order thresholds included trading limits 
established for new customers based on the maximum order size that a customer may submit in a 
                                                 
4
 Miller was charged both civilly and criminally for his actions.  See SEC v. David Miller, Case No. 3:13-cv-00522-
JBA (D. Conn.), Litigation Rel. No. 22671 (April 15, 2013) and United States v. David Miller, No. 3:13-cr-00075 
(D. Conn.), Litigation Rel. No. 22872 (Nov. 21, 2013).  On November 19, 2013, Miller was sentenced to 30 months’ 
imprisonment, followed by three years of supervised release. 
 
5
 75 Fed. Reg. at 69802. 

 
4 
single order, set at both a share level (total number of shares that a customer may submit in a single 
order) and “notional dollar” level (the maximum dollar size of a single order defined as share price 
multiplied by share quantity).  Aggregate credit thresholds were daily trading limits for a customer 
based on parameters including: (a) total number of shares traded during a day; (b) notional net 
value of trades during a day (purchases less sales); and (c) notional gross value of trades during a 
day (purchases plus sales). 
 
8. Single order thresholds were configured as either “hard” or “soft” in Client Flow 
Manager (“CFM”), MSET’s risk management proprietary software which launched automatically 
on the computers of all MSET client coverage personnel each morning.  Hard thresholds in CFM 
rejected a customer order outright if the order exceeded the single order pre-set threshold.  Soft 
thresholds in CFM held a customer order from being routed to the market by generating an alert to 
the account representative who could either release the order to the market or reject the order back 
to the customer.  MSET determined whether to set single order thresholds as soft or hard (or a 
combination of both).  Aggregate credit thresholds were always configured as hard in CFM.  As 
such, orders whose parameters exceeded the aggregate credit thresholds could not be released to 
the market without modification of the threshold. 
 
9. MS & Co.’s WSPs required it to document the hard thresholds, including both hard 
single order thresholds and the hard aggregate credit thresholds established pursuant to Rule 15c3-
5.  These hard thresholds could be modified (e.g., increased) subject to supervisory approval.  MS 
& Co.’s WSPs also required the approval and the reason for the modification to be documented.  
The process in practice occurred as follows:  (i) an MSET account representative (typically in 
direct contact with a customer) would request that a desk supervisor sitting nearby enter an 
increase to the customer’s hard threshold; (ii) that desk supervisor would then enter the threshold 
change in MSET’s system along with a reason for the change (choosing from a drop-down menu in 
MSET’s computer system without further annotation or explanation); and (iii) a separate desk 
supervisor would then confirm the threshold change in the system in order for it to take effect.  A 
number of MSET supervisors were authorized to enter and/or confirm requests to increase hard 
thresholds. 
 
10. During the relevant period, MS & Co.’s WSPs did not contain guidance or criteria 
on what factors to consider, if any, when evaluating whether to modify a customer’s single order 
threshold or aggregate credit threshold.  
 
11.   During the relevant period, the most common documented reason for increasing a 
customer’s aggregate credit threshold was “trading style,” which was one of several choices in the 
drop-down menu.  According to relevant MSET personnel, “trading style” was a general term 
encompassing the manner in which a customer was trading on a particular day.  
 
The October 25, 2012 Event and Aftermath 
 
 12. When Rochdale, a registered broker-dealer, first became an MSET customer in 
mid-2009, MSET placed Rochdale into a non-customized “starter bucket” with a $200 million 

 
5 
aggregate credit threshold.  At that time, MS & Co.’s WSPs did not contain guidelines, criteria, or 
other qualifications to use when determining initial aggregate credit thresholds for a customer. 
 
 13. On October 25, 2012, the day of an Apple earnings announcement, Miller, a 
registered representative at Rochdale, entered a series of purchase orders in Rochdale’s internal 
entry system totaling 1,625,000 shares of Apple at a cost of almost $1 billion.  Ultimately, 
approximately 860,200 of the Apple shares purchased by Miller were executed by MSET for an 
aggregate value of approximately $525 million.   
 
 14. At the time, Rochdale was subject to the $200 million aggregate credit threshold.  
To accommodate Miller’s orders, MSET twice raised Rochdale’s aggregate credit threshold 
concerning the maximum notional net value Rochdale could trade—first from $200 million to 
$500 million at approximately 12:39 p.m. and then from $500 million to $750 million at 
approximately 3:23 p.m.
6
  Both increases occurred after brief conversations between the MSET 
account representative, who was in direct communication with Miller by instant message, and an 
MSET desk supervisor sitting near the account representative who entered (or directed a colleague 
to enter) the increase.  Miller did not know that Rochdale’s aggregate credit thresholds were being 
approached (and he did not seek the increases); rather, the MSET account representative requested 
the increases of her supervisor upon determining that Miller’s order flow would exceed the existing 
threshold and upon confirming with Miller that the orders were not erroneously entered.  MSET 
did not inform Miller (or anyone else at Rochdale) that MSET was increasing Rochdale’s 
aggregate credit threshold.  MS & Co.’s WSPs contained no criteria or guidance for MSET 
personnel to consider in deciding whether to modify Rochdale’s aggregate credit threshold.  As a 
result, MSET personnel twice increased Rochdale’s aggregate credit threshold without appropriate 
due diligence to ensure that the credit increases were warranted. 
 
 15. Miller’s Apple trades through MSET also generated 20 single order “soft” 
threshold alerts between 10:59 a.m. and 3:50 p.m. that day.  (Nineteen single orders were above 
Rochdale’s $10,000,000 single order threshold and one single order contained an erroneous price 
entry.)  MSET personnel allowed all 20 orders to be sent to the market within seconds of receiving 
each alert (e.g., the alert received at approximately 11:22:53 a.m. was released at approximately 
11:23:02 a.m.).
7
  MS & Co.’s WSPs contained no criteria or guidance for MSET account 
representatives to consider in deciding whether to release single order soft threshold alerts. 
 
                                                 
6
 MSET previously modified Rochdale’s aggregate credit threshold on various dates before October 25, 2012:  
February 22, 2010, February 4, 2011, August 30, 2011, April 2, 2012, and April 3, 2012.  The largest aggregate credit 
threshold increase during this period was April 2, 2012, when MSET increased Rochdale’s net threshold from $200 
million to $500 million (and then back to $200 million on April 3).  MS & Co. produced no documentation of any 
refusal by MSET to raise the aggregate credit threshold when confronted with a customer order to purchase equity 
securities in an amount that exceeded the threshold. 
 
7
 MSET previously modified Rochdale’s single order threshold on six dates during 2009 and 2010.  For example, on 
August 4, 2010, MSET increased Rochdale’s single order threshold from $10 million to $25 million, and on 
December 9 and 10, 2010, from $40 million to $50 million.  MSET typically coded these single order threshold 
increases as “due to increased client trading volume.”   

 
6 
 16. Neither the initial increase to Rochdale’s aggregate credit threshold (from $200 
million to $500 million) nor the numerous prior single order soft threshold alerts were considered 
by MSET personnel in connection with the second decision to increase Rochdale’s aggregate credit 
threshold.  Moreover, MSET’s documented reason for increasing Rochdale’s aggregate credit 
threshold on both occasions was “trading style,” which was one of several choices in the drop-
down menu.  One MSET supervisor who confirmed Rochdale’s aggregate credit threshold 
increases incorrectly believed MSET’s credit thresholds were in place primarily to prevent against 
erroneous orders (“fat finger” errors).  
 
 17. Unbeknownst to MSET, the Rochdale customer on whose behalf Miller was 
purchasing Apple had purportedly authorized Miller to purchase only 1,625 shares.  Miller’s order 
for many multiples of what was written in Rochdale’s customer order was in fact part of a 
fraudulent scheme to personally profit by sharing the anticipated proceeds with the customer if 
Apple’s stock price increased following the earnings announcement.  When Apple’s stock price 
began dropping later that day, and it became clear that the trades would not be profitable, Miller 
falsely claimed that he had made a mistake.  
 
 18. As a result of Miller’s actions, Rochdale purchased 1,625,000 shares of Apple.  
Rochdale promptly traded out of the position, but, as a result of the decrease in stock price, 
suffered a loss of approximately $5.3 million by the following day.   Regulatory net capital 
requirements prohibited Rochdale from continuing to trade securities, and Rochdale ceased all 
business operations in approximately February 2013. 
 
VIOLATIONS 
 
 19. Section 15(c)(3) of the Exchange Act, among other things, prohibits a broker or 
dealer from effecting any securities transaction in contravention of the rules and regulations the 
Commission prescribes as necessary or appropriate in the public interest, or for the protection of 
investors, to provide safeguards with respect to the financial responsibility and related practices of 
brokers or dealers. MS & Co. violated this Section through its violations, described below, of a rule 
promulgated by the Commission thereunder. 
 
 20. Subsection (c)(1)(i) of Rule 15c3-5 requires that a broker or dealer’s risk 
management controls and supervisory procedures shall be reasonably designed to prevent the entry 
of orders that exceed appropriate pre-set credit thresholds in the aggregate for each customer.  The 
adopting release for the Market Access Rule explained that credit thresholds would be “based on 
appropriate due diligence as to the customer’s business, financial condition, trading patterns, and 
other matters,” that decisions on credit thresholds would be documented, and that “the Commission 
expects the broker-dealer will monitor on an ongoing basis whether the credit thresholds remain 
appropriate, and promptly make adjustments to them, and its controls and procedures, as 
warranted.”
 8
  MS & Co.’s controls and procedures, as reflected in its WSPs, were not reasonably 
designed to prevent the entry of orders that exceed pre-set aggregate credit thresholds for 
customers because they did not reasonably guide decisions regarding possible modifications of 
                                                 
8
 75 Fed. Reg. at 69802.   
 

 
7 
customer aggregate credit thresholds.  As a result, MS & Co. twice increased Rochdale’s aggregate 
credit threshold without appropriate due diligence to ensure that the credit increases were 
warranted.       
 
 21. Based on the foregoing, the Commission finds that MS & Co. willfully
9
 violated 
Section 15(c)(3) of the Exchange Act and Rule 15c3-5 thereunder. 
 
REMEDIAL EFFORTS 
 
 22. In determining to accept the Offer, the Commission considered remedial acts 
promptly undertaken by Respondent and cooperation afforded the Commission staff. 
 
IV. 
 
 In view of the foregoing, the Commission deems it appropriate, in the public interest, and 
for the protection of investors to impose the sanctions agreed to in Respondent MS & Co.’s Offer. 
 
 Accordingly, pursuant to Sections 15(b) and 21C of the Exchange Act, it is hereby 
ORDERED that: 
 
 A. Respondent MS & Co. cease and desist from committing or causing any violations 
and any future violations of Section 15(c)(3) of the Exchange Act and Rule 15c3-5 thereunder.   
 
B. Respondent MS & Co. is censured. 
 
 C. Pursuant to Section 21B(a)(1) and (2) of the Exchange Act, Respondent MS & Co. 
shall, within 10 days of the entry of this Order, pay a civil money penalty in the amount of 
$4,000,000  to the Securities and Exchange Commission.  If timely payment is not made, 
additional interest shall accrue pursuant to 31 U.S.C. § 3717.  Such payment must be made in one 
of the following ways:  (1) Respondent MS & Co. may transmit payment electronically to the 
Commission, which will provide detailed ACH transfer/Fedwire instructions upon request;  (2)  
Respondent MS & Co. may make direct payment from a bank account via Pay.gov through the 
SEC website at http://www.sec.gov/about/offices/ofm.htm; or (3) Respondent may pay by certified 
check, bank cashier’s check, or United States postal money order, made payable to the Securities 
and Exchange Commission and hand-delivered or mailed to:  
 
 
 
 
 
 
                                                 
9
 A willful violation of the securities laws means merely “‘that the person charged with the duty knows what he is 
doing.’”  Wonsover v. SEC, 205 F.3d 408, 414 (D.C. Cir. 2000) (quoting Hughes v. SEC, 174 F.2d 969, 977 (D.C. 
Cir. 1949)).  There is no requirement that the actor “‘also be aware that he is violating one of the Rules or Acts.’” Id.  
(quoting Gearhart & Otis, Inc. v. SEC, 348 F.2d 798, 803 (D.C. Cir. 1965)). 

 
8 
Enterprise Services Center 
Accounts Receivable Branch 
HQ Bldg., Room 181, AMZ-341 
6500 South MacArthur Boulevard 
Oklahoma City, OK 73169 
 
Payments by check or money order must be accompanied by a cover letter identifying MS & Co.  
as a Respondent in these proceedings, and the file number of these proceedings; a copy of the 
cover letter and check or money order must be sent to Daniel M. Hawke, Chief, Market Abuse 
Unit, Division of Enforcement, Securities and Exchange Commission, Philadelphia Regional 
Office, One Penn Center, 1617 JFK Boulevard, Suite 520, Philadelphia, PA  19103.   
 
 
 By the Commission. 
 
 
 
       Brent J. Fields 
       Secretary 

UNITED STATES OF AMERICA 

 Before the 

 SECURITIES AND EXCHANGE COMMISSION 

 

SECURITIES EXCHANGE ACT OF 1934 

Release No. 73801 / December 10, 2014 

 

ADMINISTRATIVE PROCEEDING 

File No. 3-16310 

 

 

In the Matter of 

 

MORGAN STANLEY & CO. LLC 

 

Respondent. 

 

 

ORDER INSTITUTING ADMINISTRATIVE 

AND CEASE-AND-DESIST PROCEEDINGS, 

PURSUANT TO SECTIONS 15(b) AND 21C 

OF THE SECURITIES EXCHANGE ACT OF 

1934, MAKING FINDINGS, AND IMPOSING 

A CEASE-AND-DESIST ORDER 

 

 

I. 

 

 The Securities and Exchange Commission (“Commission”) deems it appropriate and in the 

public interest that public administrative and cease-and-desist proceedings be, and hereby are, 

instituted pursuant to Sections 15(b) and 21C of the Securities Exchange Act of 1934 (“Exchange 

Act”) against Morgan Stanley & Co. LLC (“MS & Co.” or “Respondent”). 

 

II. 

 

In anticipation of the institution of these proceedings, Respondent has submitted an Offer 

of Settlement (the “Offer”) which the Commission has determined to accept.  Solely for the 

purpose of these proceedings and any other proceedings brought by or on behalf of the 

Commission, or to which the Commission is a party, and without admitting or denying the findings 

herein, except as to the Commission’s jurisdiction over it and the subject matter of these 

proceedings, which are admitted, Respondent consents to the entry of this Order Instituting 

Administrative and Cease-and-Desist Proceedings, Pursuant to Sections 15(b) and 21C of the 

Securities Exchange Act of 1934, Making Findings, and Imposing a Cease-and-Desist Order 

(“Order”), as set forth below. 

 

III. 

 

 On the basis of this Order and Respondent’s Offer, the Commission finds1 that: 

                                                 
1
 The findings herein are made pursuant to Respondent's Offer of Settlement and are not binding on any other person or 

entity in this or any other proceeding. 

 



 2 

 

Summary 

 

 1. The subject of these proceedings is MS & Co.’s violation of Exchange Act Rule 

15c3-5 (“Rule 15c3-5” or the “Market Access Rule”), which requires brokers or dealers to 

establish, document, and maintain a system of risk management controls and supervisory 

procedures reasonably designed to manage the financial, regulatory, and other risks associated with 

providing customers access to the markets.  MS & Co. is a registered broker-dealer that offers its 

institutional customers direct market access through an electronic trading desk that is part of the 

firm’s Institutional Equity Division (Morgan Stanley Electronic Trading, or “MSET”).   

 

 2. One requirement of the Market Access Rule is that broker-dealers reasonably 

design controls and supervisory procedures to prevent the entry of orders that exceed pre-set 

aggregate credit thresholds for customers.  The Commission adopted the Market Access Rule, in 

part, to require that brokers or dealers, as gatekeepers to the financial markets, “appropriately 

control the risks associated with market access, so as not to jeopardize their own financial 

condition, that of other market participants, the integrity of trading on the securities markets, and 

the stability of the financial system.”2  The requirement that a broker-dealer establish automated 

pre-trade aggregate credit thresholds is important because such limits “should protect broker-

dealers providing market access, as well as their customers and other market participants, by 

blocking orders that do not comply with applicable risk management controls from being routed to 

a securities market.”3 

 

 3. The events of October 25, 2012 revealed that MS & Co.’s controls and supervisory 

procedures were not reasonably designed to prevent the entry of orders that exceed pre-set 

aggregate credit thresholds for customers.  On that day, MSET twice increased pre-set aggregate 

credit thresholds for its customer Rochdale Securities LLC (“Rochdale”) (a registered broker-

dealer that accessed MSET’s platform on behalf of its own institutional customers), initially from 

$200 million to $500 million and subsequently from $500 million to $750 million, when it 

received a series of orders for approximately $525 million of Apple, Inc. (“Apple”) stock—an 

amount that would have exceeded Rochdale’s threshold had it not been increased by MSET.  

Unbeknownst to MSET, David Miller (“Miller”), the registered representative at Rochdale with 

whom MSET personnel were interacting on October 25, 2012, was using these orders to commit 

fraud.  A Rochdale customer purportedly instructed Miller to purchase 1,625 shares of Apple.  

Miller instead purchased 1,625,000 shares of Apple at a cost of almost $1 billion, scheming to 

personally profit by sharing the anticipated proceeds with the customer if Apple’s stock price 

increased.  Miller falsely informed Rochdale that he was trading on behalf of a customer.  

Approximately 860,200 of the Apple shares Miller purchased were executed through MSET, and 

Miller falsely informed MSET that these trades were on behalf of a Rochdale customer.  When 

Apple’s stock price began dropping, and it became clear that the trades would not be profitable, 

                                                 
2 Risk Management Controls for Brokers or Dealers with Market Access, 75 Fed. Reg. 69792, 69792 (Nov. 15, 

2010) (final rule release). 

 
3
 Id. at 69801.   

 



 3 

Miller falsely claimed that he had made a mistake, leaving Rochdale holding the unauthorized 

purchase and suffering a loss of approximately $5.3 million.
4
 

 

 4. As explained when the Commission adopted the Market Access Rule, a broker-

dealer should make determinations of appropriate credit thresholds for each customer for which it 

provides market access “based on appropriate due diligence as to the customer’s business, financial 

condition, trading patterns, and other matters, and document that decision.  In addition, the 

Commission expects the broker-dealer will monitor on an ongoing basis whether the credit 

thresholds remain appropriate, and promptly make adjustments to them, and its controls and 

procedures, as warranted.”5 

 

 5. Beginning in November 2011 and continuing through at least October 25, 2012 (the 

date on which MS & Co. twice increased aggregate credit thresholds for Rochdale), MS & Co.’s 

system of risk management controls and supervisory procedures was not reasonably designed to 

manage the risks associated with the market access it provided and, as a result, MS & Co. violated 

the Market Access Rule.  In particular, MS & Co. did not have reasonably designed controls and 

supervisory procedures because those controls and procedures, as reflected in MS & Co.’s Rule 

15c3-5 written supervisory procedures (“WSPs”), did not reasonably guide MSET personnel in 

determining whether to modify the customer credit thresholds that are required under Rule 15c3-

5(c)(1)(i), including in situations in which personnel were confronted with a customer order to 

purchase equity securities in an amount that exceeded the threshold.  As a result of these 

inadequate controls and procedures, MS & Co. twice increased Rochdale’s aggregate credit 

threshold on October 25, 2012 without appropriate due diligence to ensure that the credit increases 

were warranted. 

 

Respondent 

 

 6. Morgan Stanley & Co. LLC (“MS & Co.”) is a U.S.-based broker-dealer and a 

wholly-owned subsidiary of Morgan Stanley.  MS & Co. is registered with the Commission 

pursuant to Section 15 of the Exchange Act and is a Financial Industry Regulatory Authority 

member.  MS & Co. has its principal business operations in New York, New York. Morgan 

Stanley Electronic Trading (“MSET”) is a trading desk within MS & Co.’s Institutional Equity 

Division that offers its customers direct market access. 

 

MS & Co.’s Rule 15c3-5 Written Supervisory Procedures and Controls 

7. MS & Co.’s Rule 15c3-5 WSPs from approximately November 2011 until at least 

October 25, 2012 required the firm to establish pre-trade single order thresholds and aggregate 

credit thresholds
 
for new MSET customer accounts.  Single order thresholds included trading limits 

established for new customers based on the maximum order size that a customer may submit in a 

                                                 
4 Miller was charged both civilly and criminally for his actions.  See SEC v. David Miller, Case No. 3:13-cv-00522-

JBA (D. Conn.), Litigation Rel. No. 22671 (April 15, 2013) and United States v. David Miller, No. 3:13-cr-00075 

(D. Conn.), Litigation Rel. No. 22872 (Nov. 21, 2013).  On November 19, 2013, Miller was sentenced to 30 months’ 

imprisonment, followed by three years of supervised release. 

 
5 75 Fed. Reg. at 69802. 



 4 

single order, set at both a share level (total number of shares that a customer may submit in a single 

order) and “notional dollar” level (the maximum dollar size of a single order defined as share price 

multiplied by share quantity).  Aggregate credit thresholds were daily trading limits for a customer 

based on parameters including: (a) total number of shares traded during a day; (b) notional net 

value of trades during a day (purchases less sales); and (c) notional gross value of trades during a 

day (purchases plus sales). 

 

8. Single order thresholds were configured as either “hard” or “soft” in Client Flow 

Manager (“CFM”), MSET’s risk management proprietary software which launched automatically 

on the computers of all MSET client coverage personnel each morning.  Hard thresholds in CFM 

rejected a customer order outright if the order exceeded the single order pre-set threshold.  Soft 

thresholds in CFM held a customer order from being routed to the market by generating an alert to 

the account representative who could either release the order to the market or reject the order back 

to the customer.  MSET determined whether to set single order thresholds as soft or hard (or a 

combination of both).  Aggregate credit thresholds were always configured as hard in CFM.  As 

such, orders whose parameters exceeded the aggregate credit thresholds could not be released to 

the market without modification of the threshold. 

 

9. MS & Co.’s WSPs required it to document the hard thresholds, including both hard 

single order thresholds and the hard aggregate credit thresholds established pursuant to Rule 15c3-

5.  These hard thresholds could be modified (e.g., increased) subject to supervisory approval.  MS 

& Co.’s WSPs also required the approval and the reason for the modification to be documented.  

The process in practice occurred as follows:  (i) an MSET account representative (typically in 

direct contact with a customer) would request that a desk supervisor sitting nearby enter an 

increase to the customer’s hard threshold; (ii) that desk supervisor would then enter the threshold 

change in MSET’s system along with a reason for the change (choosing from a drop-down menu in 

MSET’s computer system without further annotation or explanation); and (iii) a separate desk 

supervisor would then confirm the threshold change in the system in order for it to take effect.  A 

number of MSET supervisors were authorized to enter and/or confirm requests to increase hard 

thresholds. 

 

10. During the relevant period, MS & Co.’s WSPs did not contain guidance or criteria 

on what factors to consider, if any, when evaluating whether to modify a customer’s single order 

threshold or aggregate credit threshold.  

 

11.   During the relevant period, the most common documented reason for increasing a 

customer’s aggregate credit threshold was “trading style,” which was one of several choices in the 

drop-down menu.  According to relevant MSET personnel, “trading style” was a general term 

encompassing the manner in which a customer was trading on a particular day.  

 

The October 25, 2012 Event and Aftermath 

 

 12. When Rochdale, a registered broker-dealer, first became an MSET customer in 

mid-2009, MSET placed Rochdale into a non-customized “starter bucket” with a $200 million 



 5 

aggregate credit threshold.  At that time, MS & Co.’s WSPs did not contain guidelines, criteria, or 

other qualifications to use when determining initial aggregate credit thresholds for a customer. 

 

 13. On October 25, 2012, the day of an Apple earnings announcement, Miller, a 

registered representative at Rochdale, entered a series of purchase orders in Rochdale’s internal 

entry system totaling 1,625,000 shares of Apple at a cost of almost $1 billion.  Ultimately, 

approximately 860,200 of the Apple shares purchased by Miller were executed by MSET for an 

aggregate value of approximately $525 million.   

 

 14. At the time, Rochdale was subject to the $200 million aggregate credit threshold.  

To accommodate Miller’s orders, MSET twice raised Rochdale’s aggregate credit threshold 

concerning the maximum notional net value Rochdale could trade—first from $200 million to 

$500 million at approximately 12:39 p.m. and then from $500 million to $750 million at 

approximately 3:23 p.m.
6
  Both increases occurred after brief conversations between the MSET 

account representative, who was in direct communication with Miller by instant message, and an 

MSET desk supervisor sitting near the account representative who entered (or directed a colleague 

to enter) the increase.  Miller did not know that Rochdale’s aggregate credit thresholds were being 

approached (and he did not seek the increases); rather, the MSET account representative requested 

the increases of her supervisor upon determining that Miller’s order flow would exceed the existing 

threshold and upon confirming with Miller that the orders were not erroneously entered.  MSET 

did not inform Miller (or anyone else at Rochdale) that MSET was increasing Rochdale’s 

aggregate credit threshold.  MS & Co.’s WSPs contained no criteria or guidance for MSET 

personnel to consider in deciding whether to modify Rochdale’s aggregate credit threshold.  As a 

result, MSET personnel twice increased Rochdale’s aggregate credit threshold without appropriate 

due diligence to ensure that the credit increases were warranted. 

 

 15. Miller’s Apple trades through MSET also generated 20 single order “soft” 

threshold alerts between 10:59 a.m. and 3:50 p.m. that day.  (Nineteen single orders were above 

Rochdale’s $10,000,000 single order threshold and one single order contained an erroneous price 

entry.)  MSET personnel allowed all 20 orders to be sent to the market within seconds of receiving 

each alert (e.g., the alert received at approximately 11:22:53 a.m. was released at approximately 

11:23:02 a.m.).7  MS & Co.’s WSPs contained no criteria or guidance for MSET account 

representatives to consider in deciding whether to release single order soft threshold alerts. 

 

                                                 
6 MSET previously modified Rochdale’s aggregate credit threshold on various dates before October 25, 2012:  

February 22, 2010, February 4, 2011, August 30, 2011, April 2, 2012, and April 3, 2012.  The largest aggregate credit 

threshold increase during this period was April 2, 2012, when MSET increased Rochdale’s net threshold from $200 

million to $500 million (and then back to $200 million on April 3).  MS & Co. produced no documentation of any 

refusal by MSET to raise the aggregate credit threshold when confronted with a customer order to purchase equity 

securities in an amount that exceeded the threshold. 

 
7 MSET previously modified Rochdale’s single order threshold on six dates during 2009 and 2010.  For example, on 

August 4, 2010, MSET increased Rochdale’s single order threshold from $10 million to $25 million, and on 

December 9 and 10, 2010, from $40 million to $50 million.  MSET typically coded these single order threshold 

increases as “due to increased client trading volume.”   



 6 

 16. Neither the initial increase to Rochdale’s aggregate credit threshold (from $200 

million to $500 million) nor the numerous prior single order soft threshold alerts were considered 

by MSET personnel in connection with the second decision to increase Rochdale’s aggregate credit 

threshold.  Moreover, MSET’s documented reason for increasing Rochdale’s aggregate credit 

threshold on both occasions was “trading style,” which was one of several choices in the drop-

down menu.  One MSET supervisor who confirmed Rochdale’s aggregate credit threshold 

increases incorrectly believed MSET’s credit thresholds were in place primarily to prevent against 

erroneous orders (“fat finger” errors).  

 

 17. Unbeknownst to MSET, the Rochdale customer on whose behalf Miller was 

purchasing Apple had purportedly authorized Miller to purchase only 1,625 shares.  Miller’s order 

for many multiples of what was written in Rochdale’s customer order was in fact part of a 

fraudulent scheme to personally profit by sharing the anticipated proceeds with the customer if 

Apple’s stock price increased following the earnings announcement.  When Apple’s stock price 

began dropping later that day, and it became clear that the trades would not be profitable, Miller 

falsely claimed that he had made a mistake.  

 

 18. As a result of Miller’s actions, Rochdale purchased 1,625,000 shares of Apple.  

Rochdale promptly traded out of the position, but, as a result of the decrease in stock price, 

suffered a loss of approximately $5.3 million by the following day.   Regulatory net capital 

requirements prohibited Rochdale from continuing to trade securities, and Rochdale ceased all 

business operations in approximately February 2013. 

 

VIOLATIONS 

 

 19. Section 15(c)(3) of the Exchange Act, among other things, prohibits a broker or 

dealer from effecting any securities transaction in contravention of the rules and regulations the 

Commission prescribes as necessary or appropriate in the public interest, or for the protection of 

investors, to provide safeguards with respect to the financial responsibility and related practices of 

brokers or dealers. MS & Co. violated this Section through its violations, described below, of a rule 

promulgated by the Commission thereunder. 

 

 20. Subsection (c)(1)(i) of Rule 15c3-5 requires that a broker or dealer’s risk 

management controls and supervisory procedures shall be reasonably designed to prevent the entry 

of orders that exceed appropriate pre-set credit thresholds in the aggregate for each customer.  The 

adopting release for the Market Access Rule explained that credit thresholds would be “based on 

appropriate due diligence as to the customer’s business, financial condition, trading patterns, and 

other matters,” that decisions on credit thresholds would be documented, and that “the Commission 

expects the broker-dealer will monitor on an ongoing basis whether the credit thresholds remain 

appropriate, and promptly make adjustments to them, and its controls and procedures, as 

warranted.” 8  MS & Co.’s controls and procedures, as reflected in its WSPs, were not reasonably 

designed to prevent the entry of orders that exceed pre-set aggregate credit thresholds for 

customers because they did not reasonably guide decisions regarding possible modifications of 

                                                 
8 75 Fed. Reg. at 69802.   

 



 7 

customer aggregate credit thresholds.  As a result, MS & Co. twice increased Rochdale’s aggregate 

credit threshold without appropriate due diligence to ensure that the credit increases were 

warranted.       

 

 21. Based on the foregoing, the Commission finds that MS & Co. willfully9 violated 

Section 15(c)(3) of the Exchange Act and Rule 15c3-5 thereunder. 

 

REMEDIAL EFFORTS 

 

 22. In determining to accept the Offer, the Commission considered remedial acts 

promptly undertaken by Respondent and cooperation afforded the Commission staff. 

 

IV. 

 

 In view of the foregoing, the Commission deems it appropriate, in the public interest, and 

for the protection of investors to impose the sanctions agreed to in Respondent MS & Co.’s Offer. 

 

 Accordingly, pursuant to Sections 15(b) and 21C of the Exchange Act, it is hereby 

ORDERED that: 

 

 A. Respondent MS & Co. cease and desist from committing or causing any violations 

and any future violations of Section 15(c)(3) of the Exchange Act and Rule 15c3-5 thereunder.   

 

B. Respondent MS & Co. is censured. 

 

 C. Pursuant to Section 21B(a)(1) and (2) of the Exchange Act, Respondent MS & Co. 

shall, within 10 days of the entry of this Order, pay a civil money penalty in the amount of 

$4,000,000  to the Securities and Exchange Commission.  If timely payment is not made, 

additional interest shall accrue pursuant to 31 U.S.C. § 3717.  Such payment must be made in one 

of the following ways:  (1) Respondent MS & Co. may transmit payment electronically to the 

Commission, which will provide detailed ACH transfer/Fedwire instructions upon request;  (2)  

Respondent MS & Co. may make direct payment from a bank account via Pay.gov through the 

SEC website at http://www.sec.gov/about/offices/ofm.htm; or (3) Respondent may pay by certified 

check, bank cashier’s check, or United States postal money order, made payable to the Securities 

and Exchange Commission and hand-delivered or mailed to:  

 

 

 

 

 

 

                                                 
9 A willful violation of the securities laws means merely “‘that the person charged with the duty knows what he is 

doing.’”  Wonsover v. SEC, 205 F.3d 408, 414 (D.C. Cir. 2000) (quoting Hughes v. SEC, 174 F.2d 969, 977 (D.C. 

Cir. 1949)).  There is no requirement that the actor “‘also be aware that he is violating one of the Rules or Acts.’” Id.  

(quoting Gearhart & Otis, Inc. v. SEC, 348 F.2d 798, 803 (D.C. Cir. 1965)). 



 8 

Enterprise Services Center 

Accounts Receivable Branch 

HQ Bldg., Room 181, AMZ-341 

6500 South MacArthur Boulevard 

Oklahoma City, OK 73169 

 

Payments by check or money order must be accompanied by a cover letter identifying MS & Co.  

as a Respondent in these proceedings, and the file number of these proceedings; a copy of the 

cover letter and check or money order must be sent to Daniel M. Hawke, Chief, Market Abuse 

Unit, Division of Enforcement, Securities and Exchange Commission, Philadelphia Regional 

Office, One Penn Center, 1617 JFK Boulevard, Suite 520, Philadelphia, PA  19103.   

 

 

 By the Commission. 

 

 

 

       Brent J. Fields 

       Secretary